Market transparency and international real estate investment
| Date | 05 August 2019 |
| Pages | 503-518 |
| DOI | https://doi.org/10.1108/JPIF-04-2019-0043 |
| Published date | 05 August 2019 |
| Author | Taisuke Sadayuki,Kei Harano,Fukuju Yamazaki |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Market transparency and
international real estate investment
Taisuke Sadayuki
Faculty of Political Science and Economics, Waseda University, Tokyo, Japan
Kei Harano
Department of Real Estate Sciences, Meikai University, Urayasu, Japan, and
Fukuju Yamazaki
College of Economics, Nihon University, Tokyo, Japan
Abstract
Purpose –The purpose of this paper is to provide new empirical evidence on the important role of market
transparency in international real estate investment.
Design/methodology/approach –The authors apply the augmented panel regression method (or the
correlated random effects approach) by using national panel data from 44 countries from 2004 to 2016.
Findings –Countries withbetter accessibility to market information and higherenforceability of regulations
have less informationasymmetry and attract more inward real estateinvestment. In contrast, the accounting
quality of corporate governanceis negatively correlated withinvestment, indicating thepossibility that foreign
investors enjoyhigh excess returns by investing in realestate in countries with poor accountingquality.
Practical implications –Countries lacking market transparency can increase inward investments by
providing richer market information to foreign investors and by boosting enforceability of regulation to
mitigate the uncertainty of returns on investment. Investors and public sectors in countries facing a saturated
real estate market may expand investment by investigating less-explored markets and by seeking bilateral
negotiations to secure higher predictability of return on investment in targeted countries.
Originality/value –The authors utilize updated multiple transparency indices instead of a conventional
aggregate index to examine how the investment is attributed to different aspects of market transparency and
employ the augmented panel regression method for investigation of the intra- and international determinants
of the investment.
Keywords Transparency, Panel data, Commercial real estate, Between estimator
Paper type Research paper
1. Introduction
The improvement in the availability and comparability of data on developing countries over the
past two decades has provided many valuable insights into global markets for not only investors
but also researchers. Starting from La Porta et al. (1997), who demonstrated the significance of
the relationship between the development of the financial market and the legal system, a number
of studies on the role of legal systems in financial markets (La Porta et al., 1998, 2002; Graff, 2008)
and in economic growth (Levine, 2005; Jappelli et al., 2005; Galindo and Micco, 2004) have
accrued. A large number of such studies on the relationship between legal systems and economic
growth have sought to understand how markets with diverse legal systems stimulate different
types of investments from foreign investors. In particular, international real estate investment,
accounting for a large portion of cross-border investment, can play a significant role in economic
growth and urbanization in host countries through capital accumulation and efficient land use.
Recent studies suggest the importance of the transparency of the real estate market in inward
real estate investment (Adair et al., 2006; Eichholtz et al., 2011; Falkenbach, 2009; Farzanegan and
Fereidouni, 2014; Fereidouni and Masron, 2013; Lieser and Groh, 2014; Schulte et al., 2005), while Journal of Property Investment &
Finance
Vol. 37 No. 5, 2019
pp. 503-518
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-04-2019-0043
Received 1 April 2019
Revised 22 May 2019
Accepted 22 May 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
The authors thank Jones Lang LaSalle Incorporated for providing valuable data and Fumio Shinohara
for research assistance. This work is supported by the Center for Global Studies on Culture and Society
Grant, Nihon University.
503
Market
transparency
evidence on the relationship based on a sophisticated empirical analysis is scant. As mentioned
in the study of Levine (2005), the determinants of investment should be carefully examined
considering various factors, such as legal, social, demographic and natural conditions,as well as
endogenous factors inherent in each market.
This paper aims to investigate the role of market transparency in international real
estate investment by utilizing country-level panel data to address such various factors and
endogeneity issues. It is worth mentioning the literature that relates to our study. Eichholtz
et al. (2011) analyze the performance, measured by Jensen’sα, between internationally
operating realestate companies and domestic realestate companies focusing on localmarkets
from 1996 to 2007. They find that international real estate companies underperform in the
early period, while underperformance disappears with more transparent conditions in the
later years. They argue that the improvement of the transparency of the real estate industry
has recently equalized the conditionsfor foreign investors. Fereidouniand Masron (2013) and
Lieser and Groh (2014) use panel data to examine the determinants of international real
estate investment. Fereidouni and Masron (2013) use the corruption perceptions index
provided by Transparency International as a proxy of market transparency and find that
higher transparency is associated with greater investment. Lieser and Groh (2014) collect
various socioeconomic and institutional variables across countries covering the period
between 2000 and 2009and conduct an augmented random effectpanel regression. They find
several factors that may attract international real estate investment, namely, economic
growth, rapid urbanization, compelling demographics, higher transparency in the legal
framework,ease of administrative burdensand sociocultural challengesand political stability.
Other studies examine the relationship between market transparency and aggregate FDI
(Drabek and Payne, 2002; Seyoum and Manyak,2009; Egger and Winner, 2003). Farzanegan
and Fereidouni(2014) analyze panel datafor 32 countries between 2004and 2010 and find that
the country fixed effects do not show a statistically significant relationship between market
transparency and FDI inflows to the real estate sector.
This paper brings new empirical evidence to the literature by focusing primarily on the
role of markettransparency in determining thevolume of inward real estate investment,using
updated country-level panel data covering 44 countries from 2004 to 2016. We follow the
methodology taken by Lieser and Groh(2014) and introduce new explanatory variables, such
as interestrate, house price growth, land productivity and market transparency indices, in our
analysis.Key variables are the markettransparency indices thatare provided for this research
by JLL and LaSalle Investment Management, a world consultancy company specializing in
property services and investment management. This paper differs from other studies using
the transparency index by JLL and LaSalle Investment Management (Eichholtz et al., 2011;
Farzanegan and Fereidouni, 2014; Newell, 2016; Sharp, 2013) in that we use an updated
transparency index constructing panel data with a longer time dimension, utilize multiple
transparency indices instead of just an aggregate index to examine how the investment is
attributed to different aspects of markettransparency, and employ theaugmented panel data
method (or “correlated random effects approach”as in Wooldridge, 2015) f or intra- and
international investigations of the determinants of the investment.
The estimation result suggests that countries with higher market transparency receive
more investment from foreign countries than countries with lower market transparency,
with other factors, such as economic size and growth, being constant. In particular, better
accessibility to fundamental information on the real estate market and higher enforceability
of real estate-related regulations are associated with greater inward investment. However,
the accounting quality of corporate governance is negatively correlated with investment,
implying that investors prefer investing in real estate in countries with poor accounting
quality, which generates greater excess returns for real estate investment. We also find
that investment is positively correlated with higher house price growth and lower land
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